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Citation: 2005TCC132
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Date: 20050222
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Docket: 2004-2790(IT)I
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BETWEEN:
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LÉO-PAUL MAILHOT,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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[OFFICIAL ENGLISH TRANSLATION]
REASONS FOR JUDGMENT
Tardif J.
[1] This is an appeal regarding the 2000 and 2001 taxation years.
[2] The appeal raises the following two questions:
· Was the Minister of National Revenue (the "Minister") justified in refusing to grant the Appellant deductions of $1,681 and $2,570, respectively, as automobile expenses in the calculation of his net business income for the 2000 and 2001 taxation years?
· Was the Minister justified in refusing to grant the Appellant deductions of $5,201 and $4,520, respectively, as meal and entertainment expenses in the calculation of his net business income for the 2000 and 2001 taxation years?
[3] After being sworn in, the Appellant admitted the following:
[translation]
(a) During the 2000 and 2001 taxation years, the Appellant operated a business as an insurance broker; (admitted)
(b) The Appellant did not keep any accounting books or records regarding his company during the 2000 and 2001 taxation years; (admitted)
(c) When producing his income tax return for the 2000 taxation year, the Appellant claimed gross business income of $73,265 and net business income of $41,091; (admitted)
(d) When producing his income tax return for the 2001 taxation year, the Appellant claimed gross business income of $56,463 and net business income of $20,803; (admitted)
(e) The Appellant, among others, deducted amounts as automobile expenses and meal and entertainment expenses in calculating his net business income for the 2000 and 2001 taxation years; (admitted)
(f) The automobile expenses the Appellant deducted for the 2000 and 2001 taxation years respectively include, among others, expenses of $1,681 and $2,570; (admitted)
(g) The Appellant was asked for documents in support of the automobile expenses; (admitted)
(k) Meal and entertainment expenses deducted by the Appellant for the 2000 taxation year include, among others, the following:
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Alcoholic beverages................
Meals (non-business days).......
Entertainment.......................
Other personal expenses...........
SUB-TOTAL......................
TOTAL (50%)......................
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$5,072.02
$2,954.48
$817.62
$275.90
$9,120.02
$4,520.19
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(admitted)
(l) The meal and entertainment expenses the Appellant deducted for the taxation year include, among others, the following:
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Alcoholic beverages................
Meals (non-business days).......
Entertainment......................
Other personal expenses..........
SUB-TOTAL......................
TOTAL (50%)......................
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$5,580.00
$4,236.73
$320.04
$265.89
$10,402.66
$5,200.83
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(admitted)
(m) The Appellant was asked for documents in support of these meal and entertainment expenses; (admitted)
(n) The majority of supporting documents for the alcoholic beverages submitted by the Appellant following the request are credit card receipts that do not indicate the nature or object of the expense; (admitted)
(o) The Appellant did not provide any details as to the purpose of these expenses for alcoholic beverages; (admitted)
(p) Expenses for meals are all for meals consumed Friday evening, Saturday, Sunday, or other holiday; (admitted)
(q) Entertainment expenses are mainly for the purchase of tickets for shows or movies for which no details were provided regarding clients who benefited from the expenses; (admitted)
(r) The other personal expenses are mainly expenses for the purchase of flowers or gifts, for which no details were provided regarding clients who benefited from the expenses; (admitted)
[4] The Appellant denied the following presumptions of fact:
[translation]
(h) The majority of supporting documents submitted by the Appellant regarding these automobile expenses are credit card receipts that do not indicate the nature or object of the expense; (denied)
(i) The automobile expenses were for the Appellant's personal benefit; (denied)
(j) The automobile expenses do not have any relation to the company the Appellant operated during the 2000 and 2001 taxation years; (denied)
(s) The meal and entertainment expenses were for the Appellant's personal benefit; (denied)
(t) The meal and entertainment expenses do not have any relation to the company the Appellant operated during the 2000 and 2001 taxation years;
[5] At the beginning of the hearing, I explained in detail to the Appellant that he had the burden of proof, and in particular, what such an obligation meant.
[6] The Appellant stated that he had worked in the insurance field for many years. During his career, he claimed to have been the subject of two audits and, in both cases, his claims were accepted even though he did not have any accounting or registry to support his claims. However, he later claimed that the Court of Quebec had refused his explanations while the Tax Court of Canada accepted them.
[7] He stated that despite his experience, he was never informed that he should have accounting or registries that would clarify all the expenses claimed in the operation of his company.
[8] According to him, one merely had to rely on his version of the facts, according to which all the expenses claimed were for expenses carried out for the purpose of earning income or increasing it.
[9] Self-assessment does not mean that citizens can make an income tax return and apply expenses of any nature and source to this income. To be deductible, expenses must have been made for the purpose of earning income. This does not mean that it is sufficient to claim and conclude that an expense had such an objective.
[10] Self-assessing means claiming income and expenses, and doing so in a non-arbitrary manner. Self-assessment is a type of accountability that is susceptible to an audit, which must be prepared in accordance with the relevant provisions of the Income Tax Act.
[11] II is therefore essential for any person who is required to produce an income tax report to be able to explain, justify and show the rationale of the claims. It is not sufficient to make verbal claims or general global statements to establish the relevance of income and expenses. Such an approach could lead to certain problems, or even deception.
[12] To be able to adequately justify income and expenses, it is necessary to keep appropriate supporting documents to allow for proper analysis to ensure that the relevant legal provisions are met.
[13] These supporting documents must be available, therefore it is important to have some administrative discipline.
[14] The Appellant repeated that no one told him that he needed accounting and registries with the details of his income and expenses. He therefore did not keep anything, except for the copies confirming credit card payments, which do not contain any details or explanations.
[15] After claiming he did not know about the need for keeping details identifying the nature, object and purpose of the expenses, he admitted that he did meet these requirements in the case of some invoices identified by the auditor.
[16] He stated he deliberately chose to stop such a practice because he did not believe it was useful or necessary, and moreover, in the past, he succeeded without any such details or references on invoices for expenses he was claiming.
[17] Most of the expenses that were refused were for alcoholic beverages from the Société des alcools du Québec and for meals consumed on Friday evening, Saturday, and Sunday.
[18] Given the nature and time the expenses were incurred, it would have been even more important to note as many details as possible to justify their relevance; in fact, merely reading the receipts created some doubt as to the whether the expenses were essentially personal, either partially or wholly. This made it important to have enough details to be able to dispute the apparent or assumed nature and object of the expenses.
[19] The Appellant repeatedly relied on explanations that can be summarized as follows:
· I always did this and never had any problems, even during the two previous audits, one of which was the subject of a judgment by this Court.
· I did not know this was necessary or even useful.
· Certain expenses may have been personal, in whole or in part, but this was to compensate for expenses I did not claim.
· The unclaimed deductible expenses and personal expenses claimed were about equal. [translation] "I works out about even," he said.
[20] The Appellant, an insurance agent, did not work in a vacuum. He dealt with clients and met all sorts of individuals that make up society in the course of his work. He cannot claim, as he did, that he thought his method was appropriate.
[21] Assuming fiscal obligations is not something discretionary where the person in question acts as judge and defendant as to the nature of expenses that can be applied against his or her income.
[22] Parliament set out very specific provisions, most of which are explained in various documents that are easily accessible for those who are concerned about submitting proper files.
[23] In this case, the Appellant took for granted that he, himself, decided what was deductible and what was not; in his opinion, if there were to be an audit or challenge of his explanations, his actions and essentially verbal explanations, completely uncorroborated, would have to be accepted without question.
[24] Unfortunately, things are not so simple. All taxpayers must be able to justify and explain expenses claimed against their income. To be able to meet such a burden, it is essential to have credible and valid tools to rely on, such as good accounting, various registries, and all the details required to make a rational analysis.
[25] If someone chooses not to keep anything and not have anything that would allow for such a verification, that person becomes vulnerable to consequences that may be unexpected.
[26] In this case, despite the Appellant's excuses as to the way he worked and despite his essentially verbal general explanations, I find that he did not meet the burden of proof that was his.
[27] Moreover, the balance or probabilities largely showed that the assessment was correctly established based on the information and documents available, namely unmarked invoices dealing with expenses that were essentially personal and whose nature was often supported by the time they were carried out, on weekends.
[28] The Appellant also stated that the notice of assessment had no legal basis since the Minister did not even sign it himself. The court observed that the notice had been signed for the minister and in his name by Louis Turcotte.
[29] This is a regular procedure that is completely in accordance with the requirements. Moreover, the Respondent established conformity by producing a copy of the delegation of powers:
GouvCan Publications --- Departmental Delegations,
1999/09/27 - Delegation of the Minister of National Revenue's Powers and Duties - Income Tax Act
Date: September 27, 1999
Authorization
This document supersedes the delegation of the Minister's powers and duties under Regulation 900 of the Income Tax Regulations
1. Pursuant to subsection 220(2.0 1) of the Income Tax Act as amended (the Act), I hereby authorize a person holding the position of Associate Deputy Minister and Assistant Deputy Minister in the Department of National Revenue, or a person authorized to perform the duties of one of those positions, to exercise the powers and perform the duties of the Minister under the Act and its Regulations.
2. authorize an officer holding a position in the Department of National Revenue listed in the attached Schedule, or a person authorized to perform the duties of that position, to exercise the powers and perform the duties of the Minister under those provisions of the Act and its Regulations that are set out in the attached Schedule.
.......... Martin Cauchon, P.C., M.P.
.......... Date
Note
Pursuant to subsection 220(1) of the Income Tax Act, the Deputy Minister of National Revenue may exercise the powers and perform the duties conferred on the Minister of National Revenue under the Income Tax Act.
Appendix
Subsection 165(3)
On receipt of a notice of objection, the Minister shall reconsider the assessment and vacate, confirm or vary the assessment and notify the taxpayer.
Headquarters positions
Director, Income Tax Appeals Division
Manager, Income Tax Appeals Division
Regional positions
Chief of Appeals
Team Leader, Appeals
Large Case Managers
(Emphasis added.)
[30] For all the above reasons, the appeal is dismissed.
Signed at Ottawa, Canada, this 22nd day of February, 2005.
Tardif J.
Translation certified true
on this 3rd day of October 2005.
Elizabeth Tan, Translator
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